IMF Calls Out South Korea on Its Currency Policy

WASHINGTON—In unusually strong language, the International Monetary Fund Wednesday questioned South Korea’s currency policy, telling Seoul that it should only intervene in exchange-rate markets to prevent volatility that might damage the economy.

The fund’s scrutiny of Korea’s currency policy comes after Bank of Korea’s top official indicated early this year the central bank is ready to intervene in currency markets to curb the won’s strength. It also follows criticism from the IMF’s most powerful member, the U.S., late last year. The Treasury Department said in October that it was concerned that Korea had resumed currency intervention and needed to be more transparent about its activities.

“The won should continue to be market determined, with intervention limited to smoothing disorderly market conditions,” the IMF’s executive board said in a statement on the annual review of the country’s economy.

The fund says the won is “moderately undervalued,” accounting for inflation, but the currency is coming under increased appreciation pressure as the emerging market outperforms many of its peers.

Korean officials say their efforts are to stabilize markets.

But some U.S. economists say Korea’s keeping a lid on the value of their exchange rate to bar exports from becoming too expensive.

Although countries can devalue their currency by buying foreign currency, the move puts upward pressure on other countries’ exchange rates and can fuel trade and political tensions between governments.

To avoid creating friction over currency policies, the IMF said Korea should be more candid about its exchange-rate operations.

“Directors considered that increased transparency in interventions would help enhance the credibility of the authorities’ exchange rate policy,” the fund said.

The executive board appeared to be divided, however, about whether the country should continue to build up foreign currency buffers to protect against potential economic crises.

“Some directors considered that the current level of reserves is adequate and does not warrant further accumulation, while a few others, noting the proven benefits of building a strong buffer in past crises, cautioned against prejudging the case,” the board said.

Fearing a repeat of the crises that rocked emerging markets in the 1990s–including having to tap IMF credit lines under tough economic conditions–many emerging markets have accumulated much larger stockpiles of reserve foreign currency to help protect against market volatility.

There’s disagreement among economists over what levels are sufficient insurance, however, and what’s just cover for currency devaluation.

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